In recent years, the telecoms industry has been undergoing an almost unparalleled digital transformation. Faced with shifting business models, and the steady erosion of traditional revenue streams, telcos are being forced to rethink what they offer customers.
“They must do so or they won’t survive,” says Ian West, partner and head of technology, media and telecommunications at KPMG UK. “The competition will easily outpace the ones that don’t have the energy and courage to swiftly adopt change – and this change is mandatory across all components of the traditional operating model.”
These are stark words, but they’re borne out by the facts. The sector has fallen out of favour with investors, with the value of listed telecoms companies falling by almost 20% between 2019 and 2020. They are also coming under pressure to invest in 5G and to remove potentially harmful Huawei kit from their networks, at a cost of hundreds of millions of pounds.
Meanwhile, technology breakthroughs are emerging at an unprecedented pace. “The fact that this is happening across the different domains – telecoms, computing and data – plus the accelerator effect of the pandemic in customer behaviour, has us believe that a ‘perfect positive storm’ now exists in the sector,” says West. “Telco can no longer win customers through price reduction alone. It needs to differentiate on customer experience.”
Moving beyond connectivity
This is particularly true in the wake of the pandemic. As people switched to remote working, and in-person interactions moved online, fast connectivity became little more than a baseline customer expectation. This means simple mobile or broadband services, once a selling point, are no longer enough to carve a niche in the marketplace.
“Telco businesses are having to think about how they can compete with the agile mobile competitors who are out there, but also keep the quality of the converged, fixed and mobile networks that they offer to businesses and a more mature customer set,” says Laura Morroll, director at BearingPoint. “They’re trying to be all things to all people really, at a time when connectivity is just a bread-and-butter thing.”
“[Telcos] are having to think about how they can compete with the agile mobile competitors who are out there, but also keep the quality of the converged, fixed and mobile networks that they offer to businesses and a more mature customer set.”
Laura Morroll, BearingPoint
People surveyed described connectivity as a major priority in life.
Morroll adds that the telecoms market is beginning to converge and consolidate, often packaging broadband, mobile and TV into a single service offering.
“Sky’s got into mobile, and the likes of O2 and Vodafone have got into fixed Wi-Fi and broadband technology,” she explains. “Connecting customers through a more integrated connected converged package means that they’re more likely to be loyal and more likely to stick with the brand. It’s far more economical to keep hold of your customer than to bear the cost of churn when they move onto a rival.”
While digital transformation will look different for every company, in practice it has two main aspects. First, there’s the shift in how they engage with the customer. This means moving from mostly human to mostly digital interactions – possibly reducing headcounts and real estate costs in the process.
“One of the big pieces of work that we do with telco businesses is about footprint optimisation and how many branches they need to be able to service an increasingly digital consumer,” says Morroll. “The store is a great connection point to the customer for making sales, but it comes with an estate cost attached. It’s about getting value from the branches that are there, while helping people self-serve more on transactions that don’t add value.”
Especially since the start of the pandemic, telcos have begun to recognise the advantages of re-routing their customer service through digital channels. This in turn is forcing the need for a seamless digital journey. As West puts it: “If I ‘fill my basket’ up in an app, I don’t want to start again on my desktop – and if I buy from a retail outlet, I want the freedom to return the device through digital means. Business purchasers are also expecting more, whether they are SMEs or multinationals. Digitising the full customer experience from marketing and sales to service is expected to be seamless and robust, while supporting business customers to earn revenue.”
Then there’s the shift in how telcos run internally. This might mean a wholesale change in business processes, for instance by phasing out legacy platforms and migrating systems to the cloud.
One example is Three UK, which has been on a mission to cut costs by decommissioning its in-house technologies and shifting systems to Microsoft Azure. This involved slashing some 700–800 jobs, or around 15% of its total headcount. While sales did fall slightly as a result of IT transformation (down 4% in 2020 compared with 2019), operating income over the same period halved.
Telefonica Deutschland, the German branch of Telefonica/O2, is for its part seeking to cut the costs of running its IT operations by 30% by 2025. It says that, in the future, over 80% of all applications will run in the cloud.
Meanwhile, Vodafone has migrated its enterprise and resource planning (ERP) environment to a single digital core, which has meant standardising more than 80% of its core business processes. The UK giant has also established a shared services model across the entire enterprise, beginning with the finance function. The upshot here has been to remove silos and create an environment more conducive to digital transformation.
“Legacy investment is switching off and customers are being shifted,” summarises West. “The backbone network clearly continues to get investment, but switching off legacy products and migrating customers on to new services more aggressively is supporting the reduction of the old and utilisation of the new.”
Another important aspect of digitisation lies in a company’s use of data. This is an area in which finance departments can play an active role – by using data analysis and forecasting techniques, they can make decisions more strategically.
What all these strategies share is that they cut costs, and help position telcos as modern businesses capable of holding their own against digital-native rivals.
“There have been quite a few new players coming in who are more digitally savvy, without the heavy legacy infrastructure costs of a big telco,” says Morroll. “If big telco companies lack sophistication in their digital services, the smaller, more agile, digital-first telco retailers may end up stealing the lead.”
Balancing the books
Of course, the desire to cut costs is all well and good – but what about the upfront pain of the investments telcos need to get there? To put it another way, how can the industry balance these expenses against the efficiencies they stand to gain through adopting a natively digital approach? West suggests that the biggest investment envelopes are being directed to last-generation network infrastructure deployment, with data and analytics being used to determine what the priorities are.
“The million-pound question is: which use cases will be adopted by each customer segment and at what price?” he says. “We are also seeing investments being made in the platforms that will enable the desired customer experience of the future, as well as in bringing the front-end customer journey together. The investments in the digital journey are enabling cost efficiencies but also driving revenues with a lower cost of sale, funding further investment.”
West also points out that while telco is a capital-intensive industry, the brands themselves are strong and connectivity keeps them in customers’ lives.
“By being a top priority for almost every consumer and business, [allowing them to] survive and thrive, this allows telcos to be the first contact to enable selling of adjacent services,” he adds. “5G is going to bring far more products and services to put telcos even further at the heart of digital transformation. Healthcare, manufacturing, media, port logistics are all showing large opportunities driven by 5G.”
“By being a top priority for almost every consumer and business, [allowing them to] survive and thrive, this allows telcos to be the first contact to enable selling of adjacent services.”
Ian West, KPMG UK
Consumers open to purchasing more digital services from telcos.
Telcos have implemented a roadmap for digital transformation.
Morroll emphasises that telcos, aware of the challenges they’re facing, are trying to figure out how to play to their strengths. These include the ownership of fibre fixed networks, and the ability to cement customer loyalty in stores.
Beyond that, Morroll thinks there’s a golden opportunity for telcos to get involved in the internet of things (IoT) and the so-called ‘connected home’. This might come in the form of offering advice, or even providing a call-out service to customers who need help connecting up elements of their home.
“The connected home all goes back to Wi-Fi, and therefore it feels like a natural step for the telco businesses to branch into this and find yet another way to connect with customers,” she says. “It’ll be interesting to see which players move into that space, because the electronics retail industry might also decide to play in that field. I think it’s up for grabs.”
West believes that operators are making a tremendous effort to evolve past their existing legacy environments, in which products and services developed incrementally over a period of many years. Today, connectivity alone will not suffice, and slow change will not keep a business afloat.
“Owning the connectivity opens the door, but driving further services means going digital to connect customers and support their customers’ digital journey,” he says.
In the wake of the pandemic, society has realised how indispensable telcos actually are. From a finance perspective, the task lies with steering them towards a wholesale business transformation.